Congenital and acquired deafness is a major public health problem affecting more than 36 million American people. Recent breakthroughs in stem cell biology have revealed that a complex sensory organ with all neuronal subtypes can be formed from aggregates of pluripotent stem cells in 3D culture, which seemed remote and futuristic not long ago. Spurred by these seminal studies, we have established a novel 3D culture system to faithfully recapitulate inner ear induction using a combination of small molecule inhibitors and recombinant proteins. We have demonstrated that, by precise temporal control of BMP, TGF and FGF signaling, stem cell aggregates transform sequentially into non-neural, pre-placodal and otic placode-like epithelia. Remarkably, in a self-guided process, vesicles containing prosensory cells emerge from the presumptive otic placodes and give rise to hair cells bearing stereocilia and a kinocilium. These stem cell-derived hair cells are structurall and biochemically comparable to those in the vestibular epithelia. In this study, we will first optimize our in vitro system in order to appropriately model the formation and differentiation of the entire inner ear structures, including cochlear cell types (Aim 1). We will test whether manipulation of Wnt and Shh signaling pathways alter the relative number of otic progenitor cells and cochlear cell types, respectively, derived from pluripotent stem cells. In addition, by taking advantage of our high-throughput culture system, we will begin to decipher the molecular mechanisms underlying hair cell differentiation (Aim 2). Using ChIP-based biochemical assays, we will test whether expression of prosensory genes is genetically and epigenetically regulated by Pax2 and whether constitutive methylation of a core histone protein increases the number of stem cell-derived otic progenitors giving rise to prosensory cells, and consequently hair cells. Furthermore, we will validate functional properties of these stem cell-derived hair cells and define the identity of hair cell phenotypes (Aim 3). Using a combination of single-cell electrophysiology, optogenetics and high-resolution imaging techniques, we will test whether stem cell-derived hair cells exhibit structural and functional properties of native sensory hair cells in the inner ear and make synaptic connections with sensory neurons. By accomplishing these aims, we will not only advance our understanding of the biology of hair cell development, but also establish a potent model system with which to investigate pathogenesis of various forms of hereditary deafness and balance disorders.